Tuesday 25 May 1999

CGT Rollover Relief Sought to Boost North Sea Investment

The UK Offshore Operators Association (UKOOA), the representative body for the UK offshore oil and gas industry, is urging Government to include measures in the 1999 Finance Bill to extend Capital Gains Tax (CGT) rollover relief to transactions of hydrocarbon producing assets in the North Sea.

The Industry believes that the current restriction on rollover relief is inhibiting the transfer of licences between companies which, in a mature sector such as the North Sea, is increasingly frustrating the efficient exploitation of remaining reserves.

Although asset trading has always been a feature of North Sea activity, turnover tends to increase as fields mature and cost pressures intensify. Up until the early 1990s, transactions largely involved pre-1982 fields where the impact of CGT was minimal.

Todays transactions, however, increasingly concern assets which have little or no pre-March 1982 history, and consequently are more exposed to capital gains tax. There is growing evidence that the CGT exposure is now of such magnitude that it equals or even exceeds the value gained from such possible transactions, which, inevitably in these circumstances, do not go ahead.

The Industrys concern is that the current restriction of rollover relief for CGT is impeding the rationalisation of asset ownership on the UK Continental Shelf and that as a consequence major opportunities to achieve significant cost savings and attract further investment are being lost.

The industry today still bears the burden of a largely fragmented ownership structure with many fields carrying a large number of partners, and multiple operators in the same basin duplicating activities, said James May, UKOOAs Director General.

Increased rationalisation of asset ownership would facilitate greater alignment of partners around infrastructure hubs, accelerating the integration of operations, logistics and subsurface agreements which in turn would lead to material cost savings and improved recovery.

The introduction of CGT rollover relief would be a first step in creating a positive fiscal environment to encourage more rigorous and accelerated exploitation of remaining development opportunities, he adds. It is not difficult to see that its implementation, in providing a stimulus as opposed to the present obstacle to activity, would have a long-term positive impact on the Treasurys tax yield.

The Industry is not looking for special treatment in seeking the extension of rollover relief, since in recent years assets qualifying for rollover relief have been extended to potato, milk and fish quotas, and now includes all industrial and commercial assets except those in the North Sea.

Note to Editors

1. The UK Offshore Operators Association (UKOOA) is the representative organisation for the UK offshore oil and gas industry. Its 32 member companies are licensed by Government to explore for and produce oil and gas in UK waters.

2. The Industrys lobbying of the Government on the CGT issue is in addition to other fiscal options for stimulating investment in the UK Continental Shelf (UKCS) being addressed in a Treasury study. This study is expected to be concluded at the end of May.

Future Activity Levels and Competitiveness in the UKCS

3. The North Sea is a mature province. Continued improvement in productivity and streamlining of asset ownership are essential if the UKCS is to maintain its ability to compete for investment.

4. Expenditure on exploration and appraisal (E&A) by the offshore oil and gas industry fell by some 36 per cent in 1998 to £0.8 billion, with the number of well starts sliding from 96 to 80 (source: DTI Development of the Oil and Gas Resources of the United Kingdom 1999).

5. The number of E&A wells operators expect to drill over the next three years has also slumped - down from 82 in 1997 and 59 in 1998 to 27 in 1999 and 32 in 2000. (Source: ibid.)

6. This will have an adverse effect on future development and production activity on the UKCS. The rate of investment in developing new projects is expected to decline to 35% of 1998 levels (£5.1 billion) by 2002. By 2000, capital expenditure within the Industry is expected to fall to its lowest level for over 20 years.

7. Investment is the major source of employment, new technology and UK competitiveness. It is estimated that for every £1 billion drop in investment, 45,000 jobs may be lost.

8. UKCS production is expected to peak in year 2000 and decline rapidly thereafter. UK self-sufficiency in hydrocarbons could be lost as early as 2003, with adverse consequences for the UK balance of payments. (Oil is estimated to have contributed a positive £3 billion to the UKs balance of payments in 1998.)

9. Remaining fields are now much smaller, typically only a fifth the size of fields found in the 1980s, with many requiring access to existing infrastructure in order to be commercially viable.

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